A bank by any other name

Jason Schmidt | Financial Economist

Published November 1, 2004  | November 2004 issue

A bank is a bank, right? Yes and no. Mention the word "bank," and a familiar picture pops up—you know, brick building, vault, big steel door, lots of moola, smiling face at the teller window. Cash a check. Make a deposit. Earn interest. At the bank.

Though consumers lump different types of financial institutions under the term bank, there are actually several types of depository institutions, some of which are banks (types of banks, really), and another that is technically not a bank at all, but acts like one.

When people use the word bank, usually what they are referring to is a commercial bank, which is a financial institution chartered by a state or federal agency that accepts deposits, makes business loans and offers related services. Yes, other financial institutions—like thrifts and credit unions—can offer the same things (though there are certain limits and restraints), but the main differences among financial institutions has more to do with organization, ownership and regulation.

Savings and loan associations (also known as thrifts) are federally chartered to accept savings and small deposits and make loans primarily for real estate and construction purposes. Most of these institutions are technically owned by the depositors who receive shares in the association in exchange for their deposits (which are insured by the Federal Deposit Insurance Corp. (FDIC) in the same manner as deposits at a commercial bank). Thrifts and their holding companies are supervised at the federal level by the Office of Thrift Supervision, a division of the Treasury Department.

Mutual savings banks (a close relative of a thrift) are state-chartered savings institutions which originally were designed to accept deposits from individuals and make residential mortgage loans. Over time they have broadened the type of services offered and now are considered to be the functional equivalent of a commercial bank. Deposits at mutual savings banks are also insured by the FDIC, which acts as a supervisor along with state banking agencies.

Credit unions are a not-for-profit financial cooperative that initially required individuals to share a "common bond" for membership (like employment at the same firm) which offered personal loans and other consumer banking services. Deregulation in the 1970s and 1980s gradually relaxed restrictions on both membership and the types of products and services offered by these financial institutions. Credit unions are largely indistinguishable from commercial banks today, although they are exempt from federal and state taxes due to their not-for-profit status. Deposits at credit unions are termed "shares" and are insured by the federal government through a fund operated by the National Credit Union Administration, the federal agency also responsible for supervising national credit unions.

And it is worth noting that even within the category of commercial banks, differences exist. These banks can elect to have a national charter, issued at the federal level, which subjects them to supervision by the Office of the Comptroller of the Currency (a division of the Treasury Department). Or they can choose a state charter, which brings both federal and state supervision and regulation. State-chartered banks that elect to join the Federal Reserve System are supervised by the Board of Governors (a responsibility delegated to the various Federal Reserve district banks), while the remaining state-charted banks are supervised by the FDIC.

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The January 2005 fedgazette continues the discussion of banking issues with a look at the challenges facing Ninth District community banks in a new banking environment.